Journal of Computational Finance

Risk.net

Fast Fourier transform for discrete Asian options

Eric Benhamou

ABSTRACT

This paper presents an efficient methodology for discrete Asian options that is consistent with different types of underlying densities – especially non-normal returns as suggested in the empirical literature (Mandelbrot, 1963, and Fama, 1965). The interest of this method is its greater flexibility than more standard methods. Based on a fast Fourier transform technique, the method is an enhanced version of the algorithm of Carverhill and Clewlow (1992). The contribution of this paper is to improve their algorithm and to adapt it to non-lognormal densities. This enables us to examine the effect of fat-tailed distributions on price as well as on delta. We find evidence that fat tails lead to larger jumps in the delta.

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an indvidual account here: